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What Does the New IRS Rollover Rule Mean For Me?

With 2015 quickly approaching, there is a new IRS rule investors should be aware of that begins on January 1. It is the one-rollover-per-year rule for IRAs.

What this rule states is that investors can only make one non-trustee-to-trustee rollover from one IRA to another IRA in a 12-month period. This limitation applies to rollovers in which the money leaves institutional custody, for example when a check is sent to the account holder, and the account holder then deposits it into a different account. The IRS considers all IRA accounts owned by the individual, which means Traditional IRAs, SEP IRAs, SIMPLE IRAs and Roth IRAs will be aggregated when examining the one-rollover-per-year rule.

For example, if an individual makes a Roth 401(k) to Roth IRA rollover and then does a traditional 401(k) to IRA rollover, the individual will run afoul of this new rule. If an individual happens to make this mistake, the distribution will be included in gross income and if under age 59 ½, will be subject to the 10% early withdrawal penalty. If the distribution is made into another IRA, it will also be treated as an excess contribution and taxed at 6% per year that the excess remains in the IRA. As long as it is withdrawn along with any income earned on the excess contribution prior to the due date of the individual’s income tax return, the 6% penalty can be avoided.

The good news is that the rule does not apply when transfer is made directly from original custodian (account) to new custodian, not actually going to the individual holder on the way.  This is generally the simpler and safer way to proceed, since there is no chance of missing the deposit deadline or losing the check in the mail. An investor can still make as many trustee-to-trustee transfers per year, as well as Roth IRA conversions. It will be more important than ever for investors to ensure that if they are making rollover, the rollover check should be made out to the custodian – not the individual. By making certain the check is made to the custodian, an individual does not need to worry about this new rule.

With the possible taxes and penalties involved, individuals should make certain that they understand and are complying with this new IRS rule.

 

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About Elliott Appel

As a CFP® professional and Associate Financial Advisor, Elliott works directly with clients and advisors to deliver exemplary service. Elliott graduated Summa Cum Laude from Seattle University with a Bachelors of Arts in Business Administration with a Finance Major.

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